What is Bitcoin?
Millions on millions of people have heard of Bitcoin (BTC). Still, they probably more have questions regarding what it is and what is its purpose?
The rabbit hole is significant. I’ll attempt to unpack various elements of Bitcoin in the early editions of this newsletter; however, for now, we will approach Bitcoin purely from a monetary perspective.
Bitcoin is a peer to peer electronic cash. It is a form of digital money that can be transferred between people or computers without any trusted middleman, and its issuance is not under the control of any single party.
Bitcoin is simply a form digital of money that can be sent from person to person without needing permission, authorisation or verification of an intermediary party such as a central bank. In the same way, I can give someone a £5 note without anyone's permission, and I can do the same with Bitcoin. With more considerable sums of fiat (government-issued currency), we need approval and authorisation from a trusted middleman such as a central bank.
On a £5 note, there are distinct combinations of numbers and letters that make up the code of each note. To some extent, Bitcoin is just code, but the Bitcoin code is, apparently, a work of art (I am not a coder).
We knowingly or unknowingly use money for three purposes:
A store of value: Money that maintains its value for an extended period is known as 'hard money.'
A medium of exchange: A vehicle used to align a mutuality of wants. For example, if I have many oranges but I want apples, then I have to find someone with apples who wants oranges. As a social construct, when a currency is adopted and trusted, it acts as a medium of exchange to increase the efficiency and possibility of commerce.
A unit of account: Ronseal does what it says on the tin.
For society to thrive, we want and need money to have specific characteristics”
Durable: Bananas are not a good form of money because they rot. The hardest money is that which has high durability, such as gold. Gold was once used for money and is incredibly durable and difficult to produce / mine—the supply of gold increases by roughly 2% a year.
Portable: This is where gold falls. Society realised that gold is difficult to transport—high costs to store and move, particularly internationally. Gold has significant risks such as security and loss when considering international transportation. With Bitcoin, you can send billions of pounds worth internationally at a fraction of the cost in an even smaller time frame without permission from a central bank. This portability is suitable for individuals and institutes, significantly increasing commerce and final payment.
Divisible: A dollar is divided into 100 cents, and a pound is divided into 100 pence. A Bitcoin can be divided into a unit of cryptocurrency known as Satoshis. Each Bitcoin is divisible down to eight decimal places, which means that a single satoshi is equal to one-hundredth millionth of a Bitcoin. To put it another way, 100 million Satoshis make up one Bitcoin. The satoshi is named after Bitcoin's 'founder', Satoshi Nakamoto. Satoshis are referred to as SATs.
Acceptable: For a currency to emerge, it needs to be used and more widely adopted. To be adopted, it needs to be trusted by institutes, governments and the public at large - the market.
Stable: Think supply and demand. Silver was once used as money, but once the supply of silver became readily available, silver's value declined and became what is known as 'soft money'. Gold is mined at 2% a year because it is hard to mine. This difficulty effect, combined with limited supply and scarcity, makes gold valuable. As we saw during the recent pandemic, paper money (fiat) is not difficult to create/print. Governments worldwide exponentially increased the money supply, increasing debt levels - and now we are experiencing the consequent inflationary effects. To bring this back to Bitcoin, there will only ever be 21 million Bitcoins available, making it the 'hardest' money ever in existence. It is not possible for more Bitcoins to be created.
The Bitcoin rabbit hole is real. I want to write about matters you are itching to delve into, so please send your questions regarding Bitcoin, Blockchain and Cryptocurrency investing via the form below. I will identify areas of correlation and include them in future content.
WHAT DOES ALL THIS MEAN FOR US?
It depends on what stage of life and what you are looking to achieve in your financial journey. Although I am not a bitcoin maxi, in my view, Bitcoin is the best solution to the world's currency and monetary crisis.
Fiat currency is slowly devaluing i.e. £1,000 in your savings account will not buy you the same as what it did last year. In some nations, inflationary effects are felt daily. Bitcoin plays a significant yet different role in various fiscal conditions.
Bitcoin fulfils all the requirements for intended money as a store of value, unit of account and as a medium of exchange.
When considering the essential characteristics needed for money to be most effective, Bitcoin outperforms every other current option. It is durable, portable, divisible, and the most stable. Adoption is increasing, but it is still early, so don't worry if you can't buy a whole Bitcoin. Stacking sats is enough.
Your future self will thank you for taking the time to consider financial planning and positioning ourselves for future developments.
I could have written about many elements regarding how bitcoin works and will do in future newsletters. Still, a good starting position is to begin to answer the question, what is Bitcoin? Bitcoin is digital money. Don’t overcomplicate it and don’t get lost down infinite rabbit holes.
It would be remiss of me not to leave a link to Satoshi Nakamoto's Bitcoin White paper. Although it is not an easy read, it is worth it if you want to increase your knowledge of Bitcoin.